A fool and His Money...
I have been an avid reader of The Motley Fool web site (www.fool.com) for many years.
The site was begun many, many years ago (when measured in internet time) by two brothers, David and Tom Gardner. If you go to their web site, Tom is the bald one. I always thought Tom looked more like a David, and vice versa. But I digress.
Anyway, I have enjoyed reading the web site articles and have some of their books and have undoubtedly become a better-educated investor for it. Huzzah! for me.
Most recently though, I became interested in their heavily-advertized monthly newsletters, such as Stock Advisor and Hidden Gems.
They advocate investing in some carefully researched stocks, mostly following the methods described by the gaunt-faced Peter Lynch in his book "One Up on Wall Street". On paper (well, actually on the web site) the returns are astounding. Astonishing! I was going to be rich, filthy rich beyond my wildest dreams! (evil laughter...)
Or not. Because, as the saying goes, if it seems too good to be true, it probably is.
And so it was With blue-sky optimism that I signed up for a free 1 month trial version of their "Stock Advisor" and "Hidden Gems" newsletters. And Lo, I found them to be in the usual vein of the Motley Fool - entertaining and educational. I started trading stocks.
Then, I started reading "The Four Pillars of Investing", by Mrs. Bernstein's little boy, William.
That book was the exact opposite of Lynch's in terms of its advice.
It claimed that it is foolish (small "f") to invest in individual stocks.
You can't beat the market. No way. No f#ing way. Ain't gonna happen. Pigs will fly if you do.
And I know how unlikely that is, I live with a pig and they are heavy and non-aerodynamic (though very cute and snuffly).
Well, this led me to wonder about the Gardner brothers' little newsletter. Did I smell a rat? Don't ask, I could tell you a thing or two about those as well.
Anyway, below I have distilled the main things that now, with my new found pillars of investing knowledge, bother me about the returns advertised by the brothers Gardner:
1) Trading fees are NOT taken into account when calculating their investment returns. Trading costs $10 per trade at rock bottom prices. Investing $1000 and spending $20 (once to get in, once to get out) means you have lost 2% of your money right off the bad. That can't be good.
2) Their results are compared to the results of the S&P 500. However, many of the picks in the Stock Advisor newsletters are NOT S&P500 stocks. Many are companies with smaller market caps (e.g. mid-cap or small-cap stocks). Well, if I had invested in an index fund of small cap stocks, I too, could possibly (probably) have beaten the pants of the S&P 500 as well. And I am not Warren Buffet. Actually I can't even spell his name properly. It seems possible that the higher returns that they are currently achieving are at least partially due to the recent current outperformance of smaller company stocks.
3) The returns that are advertised relative to the S&P 500 seem to be added up over the life of the newsletter - which in some cases is years. This seems a little (well, a lot) misleading, because most people are used to ANNUAL returns, not returns over a number of years. This artificially makes their returns seem higher than they are, at least at first glance. If I tell you that I have a return of 30% from stocks, you would probably fawn at my feet, begging me "manage my portfolio, O investment guru!". If I then told you I had achieved that return over a period of 5 years, you might get up and slink away, somewhat embarrassed about the whole fawning bit.
4) The wisdom of the day says that it is pretty much impossible to beat the market over the long term, because the market is "efficient". In other words, everybody else knows what you know. Unless you have insider information (shame on you! please email it to me). If so many great minds are right, how do the Gardner brothers do it?
5) What is the effect that their newsletter is having on the stock prices of the companies that get their monthly nod (typically, two per month for each newsletter)? Could it be that their recommendation alone is enough to consistently raise the price of a stock? If so, couldn't they be accused of manipulating the market somehow?
6) Most people (I would say, almost all, myself definitely included, I know because I tried it) DO NOT HAVE THE DISCIPLINE to get the returns being advertized because they will "cherry pick" from the newsletters. They will also be prone to trading out of stocks that fall significantly (and yes, some of their picks do drop, substantially). Also the typical reader probably doesn't have $1000 or more to spend on each and every stock that
the brothers recommend. So, to wave their returns in people's faces (in what amounts to an online infomercial at times) is also somewhat misleading.
7) What about the ongoing cost of their newsletters? They are about $159 a year as I remember. Guess what? That's money that ain't going to be doing that magical compounding thing for ya.
8) I admit this is sort of a low blow. But what the heck, I know you want to read it, you devil. The Gardner brothers are famous (infamous) for once recommending a technique that was subsequently shown to be nowhere near as good as they were suggesting (the "Foolish Four"). So, they have the beginnings of a track-record for giving advice of dubious quality.
Where am I going with this? Well, what I would really like to see the Gardner brothers and their cohorts to do is the following, at a minimum for their "Stock Advisor" and "Hidden Gems" newsletters (and ideally the other newsletters as well):
1) Account for the influence of the small cap and mid cap returns on the returns of their portfolios.
2) Include trading fees in their calculated returns.
3) Calculate annual results, not results aggregated over the lifetime of the newsletters
4) Run some simulations to see what the effect of cherry picking (e.g. picking 20% of the companies and selling some of them if they drop substantially) does to the returns. This is realistic because people typically have a tendency to sell low and buy high.
5) Publish the results on their web site for their readers
6) If the results don't consistently beat the combination of big/mid/small cap indexes, weighted according to their stock picks, go back to recommending index funds instead of stock picking.
7) Refund the $300 in trading fees that I lost by foolishly trading stocks instead of safely putting that money into an index fund. Oh, my wife put an end to that little adventure before it got too much out of hand. Did I mention that women are better investors than men, despite what men think?
Tom and David Gardner have have given us some great advice over the years in their books and web sites. "Yo, Respect" as Ali-G would say.
But, without some checks and balances, how can we be sure that they are not leading thousands of investors down a futile, time-consuming and possibly expensive "Gardner path"?
PS - please forgive that last pun.
posted by lkeeble @ 12:34 PM
7 comments
7 Comments:
Yeah no kidding, the guy who invented this style of investing is named John Bogle, and he did it in the 50's. He is the founder of the Vanguard Group, which now is managing 1.3 Trillion dollars.
I agree with many of your points...I too have followed the Fool for a long time and probably a majority of what I know was learned at fool.com. Like you too I also fell into subscribing to the Stock Advisor newsletter.
While I agree 100% that the Fool.com's motive has changed significantly in the last year from great sound advice for people learning to know about investing to just trying to hock another one of their new fangled newsletters which claim to do what they previously said was impossible (beat the market). I really wish they would go back to a more learning based system as their old articles were worth their weight in gold, now every single article is written to sell a newsletter.
However having said all of that, I have been a subscriber to SA and when taking into account trading costs ($7 per trade) and newsletter costs. I am beating pretty much any index you want to pick. Again this is short-term (1.5 years) so it means nothing, but overall my investment returns have increased pretty dramatically since I started using the newsletter to make some of my investment choices.
I agree 100% that they should also show annualized returns in their scorecard and there is almost a daily request for this. I also think comparing their returns to the Total Stock Market Index fund would probably be better. Trading fees wouldn't be a bad option either, although they might argue that trading fees are negligible when you consider places like Zecco.com that offer free trades and some other rock bottom brokers that are much cheaper than the $10 you mentioned. I agree with most of your premises though and think that the Fool could do better.
Thanks for the feedback from the anonymous reader and "my financial journey".
Ultimately, the proof of the pudding is in the eating, of course. And I hope that the Gardner brothers are serving up a delicious trifle with sherry, soft sponge cake and fresh raspberries.
One thing I can say from my experience - stock picking is definitely more fun (i.e. you get a similar rush to gambling) but it also has some of the same drawbacks (it's addictive and can be costly).
I am quite amused at your story.
You describe how you failed to follow the instructions and then failed to achieve the results.
You describe that you sell low, and buy high, and ditch any stock that declines before rising, and only purchase about 1/5 of the stock picks recommended. You even complain about commisions you spent SELLING stocks, meanwhile you are supposed to holding all of them.
Let me rebutt your points individually, sir.
1) You aren't supposed to be selling your stocks for some number of years, so you can't count the sell commision as a loss on your invested money. In fact you shouldn't even count the buy commision, you ought to pay the commision out of your pocket, not out of your investing dollars. In other words, if you want to invest $1000, you'll need $10 extra to pay for the cost of doing business. Alternatively you can invest $990 and stop whining.
2) They compare to the S&P to show you the difference versus if you just put all your money in an S&P index fund each month. You can easily compare their results to ANY OTHER index you want with just a small amount of brain power. I don't see this as a problem.
3) You may be "used to" annualized returns, but not all information is listed that way, and it's upto the investor to compare the figures properly, apples to apples, oranges to oranges. Nobody is trying to compare a long term return to an annualized return and then claiming to outperform. Besides, the return is the same no matter how you calculate it, it's a matter of semantics.
4) Actually, they have every right to expect to outperform the S&P 500 because that's what small cap stocks have done over the long term since the beginning of the stock markets. Sure its partly a gimmick to compare to an index that historically has returned less, but also the S&P is a popular broad measure that appears on TV, etc. They are also hoping to land a pick like a wal-mart or dell for example to boost the overall results.
5) The effect is not much different from when anyalysts from respected brokerages change their recommendations on stocks. There may be a short term effect, they may be buying and selling based on these movements, I have no idea honestly. But it's ridiculous to think the stock prices would continue to increase over the long term based on a recommendation alone.
6) This is my favorite part of your very flawed thinking. You admit that not getting the returns advertised is a direct result of not buying all the picks and not holding them for the long term. How is that anybodies fault except your own? Don't try to spread the blame around by saying that MOST people don't have the discipline. The truth is YOU didn't / don't have the discipline. Also you don't need to invest $1000 in each pick, invest as much or little as you want. The price you are paying to purchase the 2 individual stocks is $20 per month. You can buy as much or little shares as you like, the $20 is a flat fee, and that is money you "pay to play", if you don't like it (or invest too little money to be worthwhile) then go invest in a no load or rear load mutual fund instead.
7) You don't pay for the subscription out of your investing dollars, you pay for that out of pocket. Of course that money isn't doing that "magical compounding thing", anymore than the money you spent on lunch last week is. You paid for a service (the research done to reach the selection of the 2 stocks each month), you paid for someones time.
You want them to run simulations to determine what happens if people only buy 20% of the stock picks, and tend to buy high and sell low ... Are you feeling alright? Most folks don't need a simulation to figure out the results to that one.
It sounds to me like your BIGGEST problems are:
a) Trying to participate with TOO LITTLE MONEY. You must be able to afford to purchase all of the picks, and at least a few hundred bucks worth of each. If you cannot, your money belongs in a no-load or rear-load mutual fund.
b) "Cherry picking". Just because you are selecting from their pool of picks doesn't change the fact that you are speculating, or gambling, that your selections will do better or at least as well as the overall pack.
c) Failing to hold stocks for the long haul. If the company was a good value to begin with, then unless something fundamental changed, a lower price should be MORE ATTRACTIVE. You panic and sell, when you should be taking advantage of a lower price by purchasing more shares.
Just be thankful that your wife had the sense to realize your backwards mentality and save you from yourself. Given your track record and self admitted lack of discipline and tendency to buy high and sell low, you should probably stick with index funds instead.
Jon, thanks for the scathing and entertaining commentary! You are right on many points, of course. Part of the equation when investing is individual personality type - as I have freely admitted, I sadly exhibited a less-than-iron-will when investing. My point, however, is that I am human, just like anyone else (Morrissey), and many people will do the exact same thing as me in the same circumstances - panic and sell. So, their advertised returns are to be taken with a serious lump of rock salt.
I am trying to get better with time... By the way, I must say I completely disagree with your take on fees for trading and for the subscription coming "out of your pocket" and not from your investing dollars. They are ONE AND THE SAME. If not, why not?
One of my main beefs with the Gardner bros. is their conversion from "advocate of the little guy investor" to money grubbing corporate dudes. It is most unbecoming.
Having said that, I will admit that the investments that I did hang on to from their service are kicking serious stock market butt. Maybe I will try their newsletter again sometime, now that I am somewhat older and wiser.... wish me luck :)
Both Jon and The originator of this post have valid points.... both right, both wrong? I just wish I had money to invest...PERIOD ;)
Anonymous, I hear you. There are 2 ways to do this, 1) earn more and 2) spend less.....
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